3. The Ice Rider Manufacturing makes snowmobiles, some of which it sells to Japan for recreation in the wilderness of the northern islands. Ice Rider is expecting a payment of ¥9 million in six months.
a. Draw a timeline illustrating the underlying transaction.
b. Draw a payoff profile of the underlying transaction with dollars-per-yen on the axes.
c. Suppose Ice Rider takes out a forward contract to hedge this transaction. Describe this contract.
d. Describe the advantages/disadvantages to Ice Rider if Ice Rider takes out a futures contract instead of a forward contract.
Part (a)
Cash flow timeline:
At t = 0.5 years:
Part (b)
If F is the USD per yen exchange rate then
Payoff profile of the underlying transaction = F x A = F x 9 million = USD 9F million
Hence, the profile will be:
Part (c)
The contract should a forward contract to sell ¥9 million in six months at a pre determined dollars-per-yen rate.
Part (d)
Advantages of future over forward:
Disadvantages
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